More On Gamuda Again

Comments received from the posting

• jitseng said...
  A sharp view on the operation of gamuda.the nature of construction business always finance the clients.If economy turns bad,they will not be paid.during good times,margin will be small as developer dictate the terms.Most of contractor will turn to developer as they grow.never have long term view on them.

I first blogged on Gamuda back in 2006. Yes, it was that long ago. Of Gamuda and the Construction Sector. You could see that even back in 2006, I was not optimistic on the stock! (Will comment on that posting again later)

Here's another comment.

• solomon said...
  When the horsie ran off from the turf, it means she cannot endure the races. If the same principle applied on the bossie, it should not far off ya Moolah?
  
  Mr. Koon, one of the former founders had indicated some structural issues in construction. If this is not overcome, I think the industry would not as efficient as we thought down the road.
  
  If I am Mr L, the company is not a family biz like Lim's Genting, I will do the same thing....sorry minority shareholders.

Ah.. the horse racing analogy. How true isn't it? Simple logic would see one pondering how could one trust the leadership of this company when the bossie clearly showed his hand. By selling his majority stake, isn't he telling the investing public that he does not have confidence in his very own company!

Yeah... sadly... most would do the very same. Sell and cash out.

And sadly... poor minority shareholders.

Ahh... that very posting back in 2006, Of Gamuda and the Construction Sector.

Now there's no doubt that Gamuda used to be one darling of a stock. It used to trade as high as 8.00 and it reaped massive rewards for many longer term investor.

Why did the market love the stock so much?

Simple. For me, it was a growth stock and that there were justifiable reasons that the stock became a multi-bagger!

• Perhaps it would be interesting to see what was the main driver/catalyst that drove the stock so high, and for me it was the stellar earnings growth achieved by Gamuda. The earnings really was top-class.
  
  

  
  FY   Sales    Revenue
  2000 637.488  146.815
  2001 830.763  191.708
  2002 1042.752 193.899
  2003 1442.069 241.773
  2004 1719.032 281.869
  
  

  
  
  Based on the table above how could one argue Gamuda was no good?
  
  And wasn't it clear how the impressive growth in earnings was probably the main cause that drove the share so high? Long term investors would have been proud.

From a company earning 146 million in 2000, it became a company earning 281.869 million by 2004. How could one say Gamuda was no good?

That stellar growth made Gamuda and it's a known fact that the stock market loves growth stock. The growth in earnings simply equated to more earnings per share. How could the market not love 'more'? And this gave Gamuda the reputation as one of the 'strong fundamental stocks' in our local market.

And what was the driving factor again? Growth stock.

Now what if the growth story ends?

Wouldn't this not negate Gamuda status as a growth stock? Now without the growth, does Gamuda deserve its reputation as a 'strong fundamental stock'?

Now did things changed?

Continued from the same posting. (that posting was pretty much a copy and paste from one of my stock discussion here )

• Things have changed.
  
  The landscape has changed.
  
  Growth as they say it's rather finite...
  
  Now if I add in the last 2 year earnings (including yesterday earnings report), here is a different picture.
  
  

  
  FY         Sales         Revenue
  2000       637.488       146.815
  2001       830.763       191.708
  2002       1042.752      193.899
  2003       1442.069      241.773
  2004       1719.032      281.869
  2005       1661.453      265.778
  2006       1226.987      168.558
  
  

  
  
  
  Two years of decline. This fiscal year's earning was really poor.
  And based on the earnings revenue of 168 million, this would put Gamuda back to the levels it achived in its fiscal year 2000.
  
  As they say, the good times is over for now.
  
  So perhaps it would be better to remember that the 8-ringgit-Gamuda and current Gamuda is 2 totally different animal. The 8-ringgit-Gamuda had stellar earnings growth riding on its back. The current 4-ringgit-Gamuda is riding on the back of a serious decline in its earnings. Two different animals.
  
  And as you have said, the poor earnings is expected.
  
  Delay in recognition of revenue of on-going projects, completion of SSP3 and the delay in NT1 Laos (which was supposed to commence 2 years ago) were partly the reasons results are weak.
  
  And as you argued that you expect next year earnings is to pick up strongly. But where will the earnings driver come from? Moving forward, GAMUDA should resume its growth path with larger contribution from projects in middle east and NT1 Laos and its property development division. Naturally, it is also eyeing a slice of some of the targeted larger projects at home and I would be suprise if they are not successful.
  
  Very much possible. I WON'T be a bit surprised at all.
  
  However, I will be extremely cautious. I believe that Gamuda is paying the price of its earlier success and the issue of the size and reputation of Gamuda itself. Remember Gamuda is now really considered a five-star-construction company based on what it achieved from 2000-2004.
  
  But....
  
  The five-star-construction stock is simply missing the GODZILLA-sized mega, mega contracts it was enjoying back in the those days. Remember the issue of companies venturing overseas? The risks are so much more and yet these companies are willing to do so simply because the huge chunk of meat in our kampung is no longer as meaty.
  
  And because of these reasons.. i would be cautious.

That was what I written way back in 2006 and no, I did not turn cautious on Gamuda overnight!

Last night, I was reading some interesting comments from RHB Research. I find it rather enlightening.


Woahh...

• In our forecasts, we assume Gamuda to secure RM1bn worth of new jobs in FY07/10. So far in FY07/10, Gamuda has yet to secure any new contracts.

'Yet to secure any new contracts'!

Makes one wonder over the state of the construction industry.

Now do not get me wrong. I do still believe that there are plenty of jobs available in the construction sector. However, the jobs that are offered, are generally smallish in nature and the big jobs are really scarce.

Yes, how many mega jobs do we see locally? Using RHB Research report as a source of info, tThe LCCT is one. The LRT is one. And then there is the Ulu Trengganu project is another.

And that's about it.

And is Gamuda even guaranteed to make a clean sweep of all these 3 projects?

How?

And this is where it will hurt Gamuda. (this is my flawed opinion hor. my 2 sen worth and if this is not enough.. lol... I am sorry but I do not see how I can top it up.)

To justify itself in the market, Gamuda needs jobs. Plenty of jobs. And it needs to deliver earnings to justify its stock market price.

Take current market expectations. Most expect Gamuda to earn around 320 to 350 million this fiscal year. RHB, on the other hand, is one of the least optimistic. It reckons Gamuda could earn only around 290 million.

What do I think? Well, Gamuda earned only some 63 million (do note, that I am taking the net earnings as it is, ie as reported by Gamuda and I will not dissect the earnings). On an annualised basis, assuming no growth, one is looking at around maybe 250 million in earnings. And even if I add in some 10% extra to Gamuda's earnings to compensate for 'unexpected growth' or 'better than expected' earnings, one is looking at maybe some 275 million in earnings. And for a stock like Gamuda, is 275 million in earnings enough to justify its current prices?